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Gambler’s Fallacy
What Is Gambler’s Fallacy?
Gambler’s fallacy is the mistaken belief that past random events influence future outcomes. People assume that if something hasn’t happened recently, it is “due” to happen.
Why It Matters
This bias can lead to poor financial and investment decisions. It often results in:
- making decisions based on patterns that don’t exist
- chasing perceived “streaks”
- overestimating predictability
- increased risk-taking
How Gambler’s Fallacy Works
People influenced by this bias:
- assume randomness has patterns
- expect outcomes to “balance out”
- misinterpret probability
- rely on intuition instead of data
In reality, independent events remain independent.
Example
An investor believes a stock is “due” to rise because it has declined several days in a row.
Gambler’s Fallacy vs Recency Bias
- Gambler’s fallacy assumes reversal is due.
- Recency bias assumes trends will continue.
FAQs About Gambler’s Fallacy
Why do people believe in patterns?
The brain seeks order in randomness.
Does this affect investing?
Yes, especially in short-term trading.
How can it be avoided?
Understand probability and randomness.
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